Asset-Level Transparency and the (E)Valuation of Asset-Backed Securities
67 Pages Posted: 1 Oct 2018 Last revised: 13 Mar 2019
Date Written: Febuary 26, 2019
The Dodd-Frank Act mandates disclosure of information about the individual assets underlying asset-backed securities (“ABS”). Effective November 23, 2016, Regulation AB II requires issuers of certain types of ABS to disclose information about each underlying asset. We examine how these asset-level disclosures affect the (e)valuation of ABS by investors and credit rating agencies. Using a difference-in-differences approach that compares affected and unaffected types of ABS, we find that asset-level disclosures lead to (1) initial ABS yield spreads and credit ratings that better predict the subsequent performance of the underlying assets and (2) increased investor reliance on ratings. These effects occur sharply around the compliance date of the disclosure requirements. The increased informativeness of yield spreads is consistent with asset-level transparency improving investors’ valuation of ABS. Because credit rating agencies did not change their methodologies or reliance on asset-level information around Regulation AB II, public asset-level disclosures appear either to discipline the agencies’ evaluation of ABS or to increase their use of ABS price-related information. Our primary results are concentrated in deals with above-median risk layering in the underlying assets, for which pool-level disclosures are less informative, and with above-median complexity in the tranching of credit risk.
Keywords: asset-backed securities; asset-level disclosures; Reg AB II; transparency; risk layering; credit rating
JEL Classification: G21, G24, G28, L1, M41, M48
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